These are troubled times for India’s textile industry. As the rupee appreciates against the U.S. dollar, more and more small and medium-size firms are laying off workers or closing down. Industry experts say that in the southern textile hubs of Tirupur and Bangalore, a factory closes every week. Premal Udani, chairman of the Clothing Manufacturers Association of India, estimates that 500,000 to 600,000 jobs are at risk. As exporters struggle to secure profitable orders, the Ministry of Textiles’ $25.06 billion export target for the fiscal year seems well beyond reach.
While the rupee has appreciated more than 15% compared with the dollar over the last year and a half, competing countries’ currencies have not appreciated correspondingly. “Our currency is destined to appreciate,” said Anees Noorani, vice chairman and managing director of Zodiac Clothing, one of India’s leading brands in men’s shirts and ties. “But does the appreciation have to be as sudden or sharp as from 47 rupees to 39 rupees between July 2006 and now?”
The troubles come amid slackened demand from the Western consumer. With U.S. economic growth slowing, U.S. retailers have offered deep discounts. That has left India’s exporters squeezed by customers who want more for less and by a currency whose appreciation provides less when they do make sales.
“Our competitiveness for the time being has gone away,” said P.D. Patodia, chairman of the Confederation of Indian Textile Industry. The association estimates that for every 1% fall in the value of the dollar compared with the rupee, profit falls by 1.2%. “Some exporters will be permanently damaged and not all will survive,” said Subir Gokarn, chief economist for Standard & Poor’s Asia-Pacific.
This isn’t the first time prices have shrunk. Free on board prices fell two years ago when quotas imposed by the Multifiber Arrangement were lifted. India’s ready-made garment exporters, who contributed 3% of the global clothing trade, responded by boosting export values 30%. Ready-made garments now account for 43% of India’s textile exports. “Exporters were helped in reducing costs by the disappearance of the quota premium expense,” Udani said. “This time around the dollar is in a free fall, so exporters can’t plan anything.”
The United States is the largest buyer of Indian textiles and apparel, at 19% and 33%, respectively. That helps explain the degree of pain the dollar’s fall has inflicted. Apparel and textiles together contribute more than 30% of India’s net export earnings.
Supplier Consolidation
The currency-driven troubles come at an already-challenging time. Retailers are using a smaller number of vendors, bypassing traditional buying houses to source directly from a few chosen manufacturers. Committing large sums for expansion requires nerves of steel. “Unfortunately, interest rates overall in India, too, have moved up, from 7.5%-8% to 12%-13% per annum,” said Rakesh Valecha, director of corporate ratings at Fitch Ratings India. So after a federal government interest subsidy for upgrading certain machinery, “the effective cost for exporters has gone up from 2%-3% per annum to 7%-8% per annum.”
India is not well-suited for high-volume, low-margin production, Zodiac Clothing’s Noorani said. “We have not built the kind of scale that Vietnam or China has. Nor do we have the productivity to compete with the best. I therefore feel that India has missed the bus with respect to this part of the textile outsourcing business. You can see that vendors of Wal-Mart and the like are now in distress and we have a crisis.”
As recently as 2006, India, among the top five apparel exporters, seemed to be making rapid strides. The new outlook is a sea change from industry projections of exports doubling every year. “Today we are nowhere on that trajectory and are in fact selling at prices which are lower than what we sold at even five years ago,” Udani said. Many small firms operate at net profit margins between 3% and 8%. “Thanks to low gross margins, any production loss quickly turns into a net loss as well,” the Textile Industry Confederation’s Patodia said.
The industry’s woes have led some prominent participants to leave or scale back. In August, the Hinduja family, who controlled 70.1% of Gokaldas Exports, sold a 50.1% stake to the Blackstone Group, the private equity firm. Captain C.P. Krishnan Nair, chairman of the Bombay Stock Exchange-listed Hotel Leela Venture, sold his family firm Leela Scottish Lace. The textile firm had helped keep him afloat when the hotel industry and Hotel Leela’s fortunes in particular were in the dumps several years ago. The company that made 12 million pieces annually with revenue of 4 billion rupees was sold to Bombay Rayon Fashions for 1.55 billion rupees in July.
Seeking Political Patronage
The apparel and textile sector is India’s largest employer after agriculture, with an estimated workforce of more than six million. So job losses are a political hot potato. The industry is looking for government help while it adjusts to the rupee’s appreciation.
“We need a global level playing field with comparable infrastructure, interest rates, power costs and labor laws,” Udani said. It costs more to ship a container from Tirupur to the western port city of Mumbai than it does to ship one from Chennai, in southern India, to Hong Kong, he said.
Responding to industry demands, Shankersinh Vaghela, the minister of textiles, announced in November a 10% reduction on export credit guarantee premiums, a 10% to 40% increase in prevailing duty drawback rates, and a 2 percentage point reduction in pre-shipment and post-shipment credit interest rates. The government also released about six billion rupees to clear all arrears of terminal excise duties and central sales tax reimbursements. To spur the sector’s modernization, the government also offers a credit-linked capital subsidy, covering about 10% of eligible capital investments, in addition to a five percentage point interest cost reimbursement on loans taken to invest in specified advanced machinery and equipment.
S&P’s Gokarn says the fiscal measures are inadequate. “Exporters are holding the dollar price line but are getting hit on the rupee margins, and that has banks scared to fund them,” he said. Recent news media reports suggest that banks are less willing to extend foreign currency loans as they get swept up in a global flight to safety.
Textile exporters are demanding more from the government, which they believe has not paid sufficient attention to their interests when negotiating free trade agreements. India doesn’t have bilateral agreements with the United States or the European Union, its largest markets, to help bring down import duties on its most prominent items, Udani said. “On the other hand, several countries in Africa and even neighbors such as Bangladesh have such agreements in place. Instead, the free trade agreements that we have signed so far are with Far Eastern countries that get beneficial access to our large domestic market for textiles.” Noorani said, though, that the government had recognized the urgency in starting discussions with the European Union for a bilateral agreement. In the interim, the industry wants the government to allow hiring on a contract basis so it can expand or downsize operations based on market conditions.
Reengineering to Survive
Textile exporters are employing a range of management strategies to survive. After purchasing Leela Lace, Bombay Rayon Fashions plans to expand its garment capacity almost threefold in the coming years. “Larger companies can use scale to invest in newer machinery which has better quality, higher productivity and finds increased acceptability with consumers,” Fitch Ratings’ Valecha said. “Such equipment also needs less manpower. Scale advantages can also be realized with respect to freight and logistics and the purchase of key raw materials such as cotton.”
Udani estimates that scale economies can help companies lower costs by 5% to 10%. A bigger scale of operations also helps as producers woo customers looking to consolidate their relationships from hundreds of suppliers to just a dozen or so with global capabilities.
Companies are also seeking to integrate across the value chain. Firms such as Alok Industries which once were known as process houses now not only process fabric but also produce finished bed linen, quilts and bed covers, and shirts and trousers too. “If you are at the lower end of the value chain, then your ability to get price hikes is severely limited,” Valecha said.
Companies are also trying to add niche value-added material to their product mix. “If you want to sell plain blue shirts, then you need to give your buyer an offer that’s comparable to other country suppliers, and that’s getting difficult,” said Saurabh Kumar Tayal, chairman of KSL & Industries. “On the other hand, if you are selling shirts with beading and embroidery, embedded with Swarovski crystals, then you can command some value, and the EBITDA margins can be as high as 50%.” To do this, however, requires a complement of good merchandisers, the ability to supply a range of colors and a large roster of customers.
“Creating a buyer takes time. It could even be years,” said Patodia, who in addition to his role as chairman of the Textile Industry Confederation is vice chairman and managing director of Prime Textiles. The days when exporters could pack a couple of samples in suitcases, catch a plane and come back with orders are over. “Today we are getting orders for value-added garments, but these aggregate to only 30% of our capacity,” said Udani, who runs a midsize garment export unit. He said breakeven levels of production for the industry’s garment units are around 50% to 55% of capacity.
To increase orders, exporters are seeking clients in the European Union. This strategy helps diversify market and currency risk, but it offers peculiar challenges. “In the EU, every member country has a different fashion and style, and therefore orders tend to be fragmented,” Udani said. Vendors who already have clients with EU operations are trying to switch the billing currency for exports from the dollar to the euro, at least for merchandise dispatched to the Eurozone.
The transition from being commodity producers to suppliers of value-added products requires skilled managers. “There is a huge gap in the availability and requirement of personnel particularly in the areas of apparel management, merchandising, vendor management and retail specific to the apparel industry,” said Vijay Agarwal, chairman of the Apparel Export Promotion Council. “It is estimated that at junior, middle and senior level, there is a dearth of almost 250,000 managers in this sector.”
Amit Goyal, president of the Confederation of Indian Apparel Exporters, said that “the entire textile value chain needs to be strengthened. Setting up fashion hubs in the country, with the latest collection ranging from textile accessories to the finished products, is required.” The Textile Ministry is planning to create textile “investment regions” that it hopes can help reduce transaction costs and enhance competitiveness by removing procedural bottlenecks.
Most Indian companies are accustomed to steadily rising costs. This requires continuous process improvements and more intelligent use of scale. “Firms need to source their raw materials from dollar areas, control and drive costs down, increase productivity by balancing technology and reduce expenses by using energy-efficient methods of production,” Noorani said. “We have invested heavily in production systems and deskilling of operations by engineering the product on machines.”
Companies are also addressing financial management. “Exporters have become conscious of the currency risk and are not leaving their books open,” Valecha said. “They are either purchasing a forward cover or building a natural hedge via imports.”
Look Inward
Some firms have decided it’s time to use the ultimate safety net: a domestic market estimated to be worth almost $30 billion. This has come not a moment too soon, as several low-cost countries — including China, Turkey, Vietnam, Pakistan, Sri Lanka and Bangladesh — are finding the Indian market more attractive, thanks to the rupee’s appreciation. “We believe low-end export goods could find their way to domestic markets in the current rupee scenario, and this could dampen prices,” said Ashish Jagnani, an analyst with Citigroup.
Fortunately for textile exporters, the Indian consumer is increasingly demanding quality, and Indian companies are increasingly positioned to deliver. “The quality available in India has improved so that the average Indian no longer seeks to buy a shirt made overseas,” Patodia said. It is at least as profitable to supply to the domestic market as it is to export, said Noorani. A problem with catering to the domestic market, however, is the lack of customers that can place orders as large as Wal-Mart, Gap or JC Penney can. Still, large Indian retailers such as Shopper’s Stop and Pantaloon Retail have set up sourcing operations around China. Domestic textile firms need to build their franchises and relationships with the domestic retail chains that in coming years could provide a substantial source of business.
Some large textile firms are even launching their own apparel brands in the Indian market, following the examples of Raymond and Arvind Mills. Others are going a step further. Welspun is setting up a chain of home textile stores under the name “Spaces.” Alok is setting up a textile and apparel retail chain branded “H&A.”
Such retail strategies also present challenges. Firms planning dedicated retail chains must contend with consumer preference shifting in favor of multibrand outlets. And attracting customers loyal to their exclusive stores won’t happen overnight. “This is a long gestation business that takes capital,” Tayal said. “The minimum breakeven period for a store is one year.” Some firms that have ventured into retail chains are finding rising commercial real estate prices an impediment to their ability to roll out with the speed to attain critical mass.
Building a brand in an already-competitive market, thanks to the presence of international brands such as Arrow and home-grown brands such as Zodiac and Provogue, requires perseverance. “It’s not easy if all you have been doing is selling fabric and yarn,” Fitch Ratings’ Valecha said. “This requires a different mind-set, expertise and skills sets, and the ability to take additional risks. It could take years to establish brands.” The saving grace is that textile companies may have a better chance of building a brand that connects with Indian consumers than one that connects with consumers overseas.
Some Indian firms are acquiring companies in the developed world. These are either retail chains or marketing agents they have traditionally sold to. The silk yarn and fabrics maker Himatsingka Seide in October bought U.S.-based DWI Holdings for $30 million. DWI, which has the license for marketing brands including Calvin Klein, Barbara Barry and Royal Sateen, had revenues of $47 million in fiscal 2007.
In August, Alok Industries, through its wholly owned subsidiary Alok Industries International, signed an exclusive license agreement with AISLE 5 of New York for its portfolio of lifestyle brands — aworld and Cotton + Clay. Under the multiyear license, the company acquired the manufacturing and distribution rights of bath, sleep, dining and home decor textile products sold through supermarkets in the United States and Canada. In April, Alok bought 60% of Czech firm Mileta, which has established relationships with premium customers for its high-end cotton fabrics.
Welspun bought a controlling stake in British home textile firm Christy in July 2006 to gain a wider presence in the United Kingdom. Home textiles firm GHCL in February 2007 bought New Jersey-based home textiles manufacturer and distributor Best Manufacturing Group for $35 million, and in July 2006 acquired Rosebys, a British home textile retail chain, for $50 million.
